Gap lays out next phase of growth plan

Online, franchise, outlets, China among target growth initiatives

NEW YORK (MarketWatch) — Gap Inc. shares have risen 37% in the past 12 months, making it the best performer among apparel retailers in the S&P 500 Index.

The largest U.S. specialty clothing chain is hoping a growth strategy that focuses on expansion online and overseas, especially in China, coupled with opening more outlets will continue to whet investor appetite.

At its meeting Wednesday with analysts and investors in its San Francisco headquarters, the company said it will begin to franchise Old Navy, its biggest unit, next year in certain international markets. The discount brand opened its first company-owned stores outside of North America in Japan last year.

Bloomberg/file 2012

Employees wait for customers at the checkout counter at the Old Navy shop in Tokyo.

Gap also will explore adding company-operated Old Navy and Banana Republic stores in China, where it currently only has locations under its namesake brand. Gap said it will continue to build its online and physical store omni-channel platform, including shipping more online orders from stores, an initiative it first introduced last year.

Gap’s “strategic goals aligned with our view of future of retail and if execution is good, (per-share profit) growth will be encouraging,” said Citigroup analyst Oliver Chen. “There’s a shrewd evolution taking place.”

Gap shares fell 1.8% on Wednesday as the broader markets also retreated.

The company said it also will invest behind growing its Piperlime, Athleta and newly acquired Intermix brands.

Gap executives led by Chief Executive Glenn Murphy didn’t quantify and layout several specific growth targets or how much Gap plans to spend behind several growth initiatives, but he offered some indications of the potential. For instance, Murphy said Gap only held a 3.9% market share in the $300 billion North American apparel market, and about a 0.25% share rest of the world.

Under Murphy, who joined in July 2007, Gap stock almost doubled during the almost six-year period as he has reduced the square footage of the company’s company-operated stores by 11% and has shut Gap brand’s North American specialty store fleet by 34% to 700 stores. He also reduced the size or relocated its Old Navy stores. Gap plans to open about 160 company-run stores this year, focusing on Athleta, Gap China, Old Navy Japan and global outlets, leading the square footage to increase by 1% by the end of the year.

To turn around its sales, the company moved its Gap brand design team and created a global creative center in New York in 2011. Murphy last year hired a 15-year H&M veteran, Stefan Larsson, who was part of the team that helped H&M to expand to 44 countries from 12, as head of Old Navy. Old Navy is about two-fifths of the company’s total of $15.7 billion in sales last year.

Gap also has unveiled such campaigns as Be Bright at its namesake brand, featuring a colorful assortment of pants and other merchandise, and has rolled out partnership collections such as the Mad Men line at Banana Republic to increase traffic and sales.

To make it better able to respond to fashion trends, Gap has also reduced its cycle time, or the time it takes from product design to store shelves, by about one third.

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The company also sees opportunity from wringing more sales from its selling space.

Sabrina Simmons, Gap’s finance chief, said the company can eventually return to its peak of $400 sales per square foot, from $364 last year. That alone would translate to additional $1 billion in sales, she said.

Gap currently generates about 86% of its sales from its stores, with about another 12% from online. Franchise makes up the rest.

Franchise makes sense “in small and more complex markets,” she said, adding in addition to franchised stores, the company also generates higher profit margin from its online and outlet segments compared with its specialty stores in North America. “This is a high return and low capital channel.”

As Gap expands overseas, executives said the company plans to tout a global fit with about 70% to 80% of its products featuring a global design with the rest tailored to local market needs.

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